Question: Using a graph like Figure 17-3, show how a monetarist can argue that a contractionary fiscal policy need not lead to a fall in real

Using a graph like Figure 17-3, show how a monetarist can argue that a contractionary fiscal policy need not lead to a fall in real GDP given a fixed money supply. Explain.

Figure 17-3

(a) The Increase in Aggregate Demand from an Expansionary Fiscal Policy Is Limited When the Money Supply Is Fixed... (b)

(a) The Increase in Aggregate Demand from an Expansionary Fiscal Policy Is Limited When the Money Supply Is Fixed... (b) ... Because the Increase in Money Demand Drives up the Interest Rate, Crowding out Some Investment Spending. Interest rate Aggregate price level MS SRAS ..... E2 E1 AD2 AD, MD. MD2 Real GDP Quantity of money ........

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